Small stocks make big gains in 2012, large peers lag behind

New Delhi: The minnows of stock market seems to have stolen the show on Dalal Street in 2012 with better returns than their large blue-chip peers and appreciation of up to 40 percent in their share prices.

While the stock market has seen a smart across-the-board rebound towards the end of the year after taking a big beating in 2011, it is the shares of medium and small size companies in terms of market valuations that have recorded better gains on a full-year basis.

As the year 2012 draws to an end, the mid-cap and small-cap indices have appreciated by about 40 percent and 35 percent, respectively, shows an analysis of the BSE data.

In comparison, the bellwether bluechip index Sensex has gained about 25 percent during the same period.

The smart recovery in all the three segments of the stock market were in sharp contrast with their performance in 2011, when the indices had a bruising fall of up to 42 percent.

The mid-cap index and small-cap index had lost 34 percent and 42 percent, respectively, while Sensex lost about 23 percent last year.

Analysts said that higher foreign fund inflows, strong intent from the government towards reforms and cheaper valuations are some of the driving factors behind the smart rally in the broader markets this year.

"Sensex has gained around 25 percent so far in 2012 aided by FII inflows which bought stocks worth over USD 22.5 billion. This winning situation in the market seems to be the outcome of blast of liquidity from western central banks, coupled with government's renewed interest for reforms since September," Aditya Trading Solutions MD Vikas Jain said.

Funds that invested in mid and small-cap stocks performed better than large-caps even during the choppy trading days of the year, he added.

According to Edelweiss Financial Services' Head of Research Vinay Khattar, decisions to open up FDI in multi-brand retail and civil aviation, as also hike in fuel prices, were among the major policy initiatives that helped the markets.

Besides, Union Cabinet also recommended a hike in FDI in insurance sector to 49 percent and proposed FDI in pension.

In comparison, several negativities like slowdown in domestic economic growth, multiple scams and elevated global economic risks had hit hard the investor sentiments in 2011.

"Fall in mid-caps and small-caps was much more brutal between 2008 and 2011. So a faster reversal is not a surprise," Milan Bavishi, Head Research, Inventure Growth & Securities said.

According to market experts, small and mid-caps suffer the most during times of uncertainty and crisis due to weaker balance sheets, which reflects in their stock prices as well.

"As the situation started improving in the US and Europe and RBI started easing monetary policy, the broader markets benefited more than the benchmark indices in 2012," Jain said.

On the outlook for these sectors in the New Year, Jain said: "Typically, when the economy expands, mid-cap and small-caps lead the gains, but when slowdown arrives, they are the worst affected."

"2013 is expected to mark the turnaround in Indian economy after a long dull phase. Amid growing indications of economy stabilising, mid-caps and small-caps are poised to rise faster than large-caps and the overall market. Moreover, the RBI too looks set to cut rates in January," he added.

According to Bavishi: "If money inflow continues and the government remains pro-active in introducing and implementing reforms, one can expect rally to continue in 2013 as well."

In terms of valuation, the market capitalisation of BSE-listed small cap companies rose by over Rs 83,542 crore from the start of the year.

Similarly, the market valuation of mid-cap firms surged by Rs 2.62 lakh crore. However, the gains for the 30 Sensex blue-chip companies are much higher at Rs 14.26 lakh crore.

The large cap, mid-cap and small-cap indices scaled their highest one-year levels on the same day that is December 11.

"The undercurrent in the Indian market is expected to be upbeat next year as well, buoyed by improving economic fundamentals, possibility of further reforms and positive FII flows. This will rub-off positively on small-cap and mid-cap stocks. However, one needs to tread cautiously when it comes to the broader market stocks, as they tend to be volatile in nature and have relatively low liquidity," Khattar said.

Mid-cap and small-cap stocks are generally looked at by local investors, whereas overseas investors' largely prefer to invest in large-cap stocks.

The mid-cap indices track the performance of companies with market value that are a fifth of blue-chip firms (large-caps), while the m-cap of small-cap firms are of almost one-tenth of an average large-cap stock.